The stock market has boosted retirement account balances. Experts say retirees still need to be cautious.

• The stock market's handsome returns have boosted Americans' retirement account balances.

• The number of 401(k) millionaires increased and the average account balance reached a two-year high.

• The source reminded all those considering retirement not to be complacent and to save for a rainy day if they want to capitalize on their gains.

The soaring stock market is creating many 401(k) millionaires.

The number of people with at least $1 million in their retirement accounts grew 20% year-over-year in the fourth quarter of 2023, with the average account balance rising to its highest level in two years, thanks to the market's impressive uptrend since the beginning of 2023, according to Fidelity.

While bullish workers may be tempted to start taking money out to fund their post-employment lifestyles, or even to start taking money out before retirement, investment experts warn against such considerations, even as markets set new records and optimism runs high.

Here are a few things people need to consider if the market's continuous surge might tempt them to consider retiring early or using those funds, experts say.

People live longer.

Brian Spinelli, Simmons Simmons Investment Officer at wealth advisory firm Halbert Hargrove, told Business Insider that early retirement based on market performance is not a carryover for the simple reason that people are living longer these days.

"Now, the number of years you have to use your own funds is getting longer and longer. So if you retire too early, your portfolio may run out because you have a longer life expectancy than you think," he said.

People who retire too early may underestimate the amount of money they will need to fund their desired lifestyle by ignoring the simple fact that they may live longer than they expect and that untaxed 401(k) contributions may require more withdrawals to cover taxes.

"The biggest single risk we see is that most investors underestimate their longevity, time horizon, and opportunity costs without a great deal of education, increasing the risk of short-term losses while increasing the risk of poverty in later life," Aaron Anderson, senior vice president of research at Fisher Investments, told Business Insider in an email. Aaron Anderson, senior vice president of research at Fisher Investments, told Business Insider in an e-mail.

"If they need $100,000 in net income, then they're going to have to withdraw $120,000 to $130,000 a year from their million-dollar 401(k) accounts to pay taxes to get that $100,000," Spinelli said, adding that with a 30-year life expectancy, it's unrealistic to expect that in the absence of a recession He also added that with a 30-year life expectancy, it would be unrealistic to expect the annual growth rate to be much higher than 12% or 13% without a recession.

The market is volatile.

Investment experts also caution against believing that the market will continue to produce large returns year after year. Stocks will rise by nearly 251 TP3T in 2023, but this is an outlier, and the rate of return will level off over time with normal increases and decreases, with the average annual increase in the S&P 500 index only about 101 TP3T.

"The long-term average rate of return for stocks is about 10% per year; however, this average is made up of widely varying annual returns. Nearly two-thirds of the time the market is either up (+20%) or down, while the 'average' rate of return (0-20%) occurs only about one-third of the time," Anderson writes.

Uncertainty about the future often brings "sequence-of-returns risk," which is overlooked by early retirees.

"The difference between an investor taking early withdrawals from their pension and allowing it to continue to enjoy the benefits of compound interest growth can be huge," Anderson added.

The desire of the baby boomers to cash in on their gains could also trigger a sell-off that could drag the market down. Some argue that more older Americans owning stocks is risky because they don't have the luxury of waiting for a downturn, and may panic sell during a downturn, fueling further declines.

Sources emphasized that retirees need to "stress test" their retirement plans, factoring in market adjustments, life expectancy, inflation, asset shrinkage and spending projections.

"Can you survive long enough for the market to recover and still make sure you don't outlive your money? If the answer is no, maybe you need to spend more time working.

Read the original article on Business Insider